1. Technical Field
Disclosed embodiments relate generally, by way of example and not limitation, to systems and methods that provide an investment instrument (e.g., a certificate of deposit) with periodic principal payments.
2. History of Related Art
A certificate of deposit (CD) is an investment instrument offered by financial institutions, such as banks and credit unions. With a CD, an initial sum of money, called the principal, is given by the customer to the financial institution, which holds the money for a specific, fixed term. In exchange for allowing the financial institution use of the principal for the fixed term, the financial institution pays the customer interest at a fixed annual rate for the duration of the term. Examples of fixed terms for a CD include three months, six months, one year and five years. CDs are typically held until maturity (i.e., at the end of the term), at which time the principal may be withdrawn together with the accrued interest. General rules of thumb for interest rates for CDs are as follows: 1) the larger the principal, the higher the interest rate; 2) the longer the term, the higher the interest rate; and 3) the smaller the financial institution, the higher the interest rate.
At most financial institutions, a CD holder can opt to receive the interest periodically as a paper check or via an electronic transfer into a checking or savings account. However, this option reduces total yield because there is no compounding of interest over the term of the CD. Some financial institutions allow the customer to select this option only at the time the CD is purchased.
Financial institutions often mail a notice to the CD holder requesting directions shortly before the CD matures. The notice usually offers the CD holder the choice of withdrawing the principal and accumulated interest or depositing the principal and accumulated interest into a new CD (i.e., “rolling the CD over”). Generally, a time window is allowed after maturity, during which the CD holder can cash in the CD without penalty. In the absence of directions to cash in the CD, it is common for financial institutions to roll over the CD automatically, tying up the principal and interest for an additional period of time. However, the CD holder can in some cases specify at the time the CD is opened that the CD is not to be automatically rolled over.
In many CDs, the deposited principal and accumulated interest can be withdrawn before maturity. However, withdrawals before maturity are usually subject to a substantial penalty. For example, a CD having a five-year term often has a penalty for early withdrawal of six months' interest. Such a penalty ensures that it is generally not in a CD holder's best interest to withdraw the accumulated principal and interest before maturity, unless the CD holder has another investment with a significantly higher expected return or has a serious need for the principal and interest minus the penalty.
CDs typically require a minimum deposit of at least $1,000. Many offer higher interest rates for larger deposits. For example, a one-year term CD offered by a particular financial institution may have an interest rate of 5.08% for a principal deposit of $1,000-$94,000, an interest rate of 5.23% for a principal deposit of $95,000-$174,999, and an interest rate of 5.33% for a principal deposit of $175,000 and greater. In exchange for keeping the deposited funds for the agreed-upon term, financial institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand, such as a savings account.
One advantage of CDs as compared to other investment instruments is that CDs generally provide for a higher interest rate than a savings account, while still being insured by the Federal Deposit Insurance Corporation (FDIC). In contrast, money market accounts are not FDIC insured. However, a disadvantage of CDs is that CDs require a higher initial investment than some customers are able to provide.